Reach Company Goals with Leading and Lagging Indicators

February 28, 2018

Do you want to increase revenue, decrease churn, strengthen your active user base, sell more products, close more deals, or improve the performance of other key indicators of company success? Identify your leading and lagging indicators. Once you’ve done that, figure out how they influence each other and track their performance. Doing so will allow you to make timely changes when you see signs of developing problems, so you can achieve the company success you’re hoping for.

What are lagging indicators?

A lagging indicator in business is a measurable factor that changes only after a specific aspect of business has begun to follow a particular pattern or trend. Essentially, lagging indicators show long-term business trends, but they don’t predict them.

Past company efforts influence your lagging indicators. The amount of revenue you brought in during a specific time period is a lagging indicator.

Identifying and tracking lagging indicators lets you know if your efforts have you on a trajectory to reach your goals. You should have milestones that help you know if you on track to meet your goals. Meeting milestones lets you know your plans are working. Missing milestones lets you know a departmental or organizational pivot is necessary to get back on the right track.

Some lagging indicators are universal, but others vary according to specific industry and business models. Here are a few lagging indicators from different industries:

Lagging indicators can be easy to identify and measure but harder to influence.

Lagging indicators serve as a starting point on the road to improvement. If a lagging indicator shows negative results, it’s too late to correct the damage that has been done. But it’s not too late to correct any future damage that might occur.

Knowing and tracking what you need to improve (your lagging indicators) helps you figure out how to create the results you want.

What are leading indicators?

Leading indicators in business are used to gain a sense of the direction a business is headed. Company leaders use them to adjust their strategy to create positive future business conditions.

Leading indicators measure the efforts and processes that should create successful conditions. They are typically tied to employees’ actions. Identifying and tracking your leading indicators is the key to achieving positive results.

Good leading indicators should help you forecast whether or not you will reach company goals. This makes leading indicators more difficult to correctly identify than lagging indicators because you’re attempting to predict which actions will create the results you want.

Valuable leading indicators should help you address company challenges. That way you can realign your actions and strategies to make your company successful.

Leading indicators benefit companies in a variety of ways by:

Creating visibility of the efforts and activities which impact the future

Helping leaders know where to improve performance

Setting individual and team performance expectations

Holding employees accountable for their responsibilities

Helping to maintain consistent execution of high-impact efforts

When employees know which activities contribute to company goals, that those activities are being measured, and how they are being measured, consistent high-level execution of winning efforts becomes much more likely.

Identifying the correct leading indicators requires research and thought. When you’re identifying your leading indicators, ensure you select leading indicators that identify which actions cause the final results you want.

Your leading indicators should be specific to your company and drive you towards your main business goals.

Winning with leading and lagging indicators

Tracking your leading indicators helps you identify when potential problems are brewing so you can create and implement a plan of action to avoid a negative outcome. This forward-thinking approach helps you catch and correct problems before their effects trickle down to your lagging indicators.

Here’s an example of how monitoring leading indicators can help your company.

Say you’re a SaaS company that provides a CRM platform. Customers typically use your product daily and sign up for a one-year contract with a six-month opt out.

To help you monitor your growth and ensure your efforts result in growth, you’re tracking customer churn along with your Daily Active Users.

The six-month opt-out date hits and several customers churn out. This creates a significant dip in revenue which causes you to miss your goals and leaves you wondering how to avoid this in the future.

The question you need to answer is, can you predict churn? The answer is yes! To do so, you need to identify signs that indicate which customers are becoming churn risks. This requires studying a group of faithful customers and a group of churned customers to discover the significant differences between them. You’re looking for answers to some of the following questions:

How often do they use the tool?

What features do they use?

What are common usage choke points?

You need to learn the typical activities and activity level that indicate which customers are satisfied and which ones are not.

You study these groups and identify some leading indicators that will help you reduce your churn, you lagging indicator.

Your leading indicators to predict whether or not a client will continue to use your product include:

This does not mean that using your tool in these ways is the only way a customer will stay with you. It simply represents the actions that indicate a satisfied customer in a majority of instances.

Using these indicators, you design implement a plan to identify at-risk customers early and help them find value using your product.

When the next group of customers reaches their six-month opt out, a large majority continue using your product and you reach your customer and revenue retention goals.

Finding the right combination

Identifying your correct leading indicators can be a trial and error process. You won’t always identify the right leading indicators the first time. Guilherme Lopes the co-founder and VP of CS at Resultados Digitais wrote a great article about the process his company went through selecting a lagging indicator and then identifying the corresponding leading indicators that would impact that lagging indicator.

TIP: Your primary leading and lagging indicators can change as your company grows and changes.

Effectively tracking your leading and lagging indicators

Once you’ve identified your leading and lagging indicators, you need a tool that will effectively help you track them so you can see when changes are occurring. Visualizing your indicators on metrics and with BI dashboards will help you stay up to date on your indicators so you can lead with confidence and have a greater chance of achieving your goals.